Beware of being locked into poor-performing bonds

Category:
Savings

Updated:
13/02/2014
First Published:
13/02/2014

MONEYFACTS ARCHIVE

This article was correct at the time of publication. It is now over 6 months
old so the content may be out of date.

For savers wanting to get the most from their cash savings, fixed rate bonds have often been the way to go. They can offer the chance for better returns than with easy-access accounts on the provision that you keep your money locked away for a set period of time, but with interest rates plummeting you might not be left with as much as you'd like. Savers who are coming to the end of their fixed rate period should be particularly wary, as if they fail to act they could be locked into an account paying even more pitiful rates…

Know your stuff

Moneyfacts figures show that the average rate on a long-term fixed bond is currently just 2.19%, whereas five years ago it was 3.04% – so if you're coming up to your bond's maturity date you could be in for a shock, as chances are you won't be getting as high a rate as you were before.

That's why it's so important to be on the ball. Your savings provider should let you know when your bond is coming up to maturity, and should ideally give you options of what to do next. Normally you'll be given the choice of:

Rolling it over into another fixed rate account,

Withdrawing the money,

Or transferring it elsewhere,

But be warned – if you don't take action they'll decide for you, and that means you could be locked into an account paying paltry rates.

Some providers might transfer the funds into an alternative bond (complete with an interest penalty if you later decide you want to withdraw it) or simply to an easy access account paying even lower rates, so it's vital you stay up-to-date and know what's going on. You'll usually get a limited window during which you can take action, often only around 14 days, although some providers will let you know the maturity options when you take out the bond.

Of course, every provider is different – some will start communicating months in advance of your maturity date whilst others will only give you a few weeks' warning, and they'll all have different maturity options too. So, make sure to be on the lookout for communication from your bank or building society so you know what dates you need to take action by, and ideally note down the maturity date as soon as you take out the bond so you're totally prepared.

Consider the alternatives

Simply accepting the fact that your fixed account will be rolled over, without considering the alternatives, should never be a possibility – unless you want to be stuck making negligible returns – so it's vital you compare the options to see what else is out there.

If you're not happy with the new bond offered by your current provider there are a range of alternatives if you want to make the most of your savings. You might like to consider the benefits of a stocks and shares ISA, for example, or if you want to stick with the security of a cash account you need to make absolutely certain you're getting the best rate.

A lot of providers occupy the fixed bond space which means there are plenty of accounts you can choose from, and you'll be able to find some great rates too –Close Brothers Savings, for example, offers a highly competitive 2.60% with their Select Gold 3 Year bond – so make sure to decide how long you're willing to lock your money away for and start searching accordingly.

Switch before you're fixed

As Sylvia Waycot, editor of Moneyfacts.co.uk, says: "Fixed rates bonds are really straight forward until you get to the end of the term, then all the variables come into play. It is not that any of them are difficult, it's just that too many people let apathy rob them of a better rate. Don't let that be you."

So, make sure you've got a new account ready to go before your current bond reaches its maturity date, as if you leave it too long you could be locked in – and potentially needing to pay a penalty if you want to withdraw your funds. Compare the available options and switch before you're fixed, ensuring you can generate the best possible returns from your money.

Good news from RCI Bank UK – its latest research shows that many of us are saving more than we were a year ago, but the question is, will you be dipping into that buffer to cover the cost of Christmas?

Easy-access savings accounts are as simple as they sound – they allow you to access your money whenever you need it, without having to give advance notice, and they also allow you to pay into them at any time. Here are six of the best.